Entrevista de Marcos Assi para a Retail Banker International
Brazilian calm after fraud storm
The disclosure of a long-running fraud in a mid-size Brazil-based bank raised alarms about governance and regulation in the country’s banking industry. But, as Rodrigo Amaral reports, the authorities claim the case demonstrates the regulatory framework works well and prevented the scandal affecting the whole sector
In November, the Brazilian Central Bank revealed that large discrepancies had been found in the reporting of operations involving the sale of loan portfolios at Banco Panamericano, the country’s 20th largest bank by assets.
The case attracted much attention in the Brazilian media because Panamericano’s majority shareholder is a media magnate and one of the most loved public figures in the country.
It also caused concern because Panamericano received a capital injection last year from Caixa Econômica Federal, (CEF) the stateowned retail bank, after doubts were raised about its financial health.
But CEF, which acquired a 49 percent stake in the bank, failed to detect the problems in Panamericano’s balance sheet, even though a due diligence procedure was performed before the operation was sealed.
According to the investigators, Banco Panamericano sold hundreds of millions of reais in loan portfolios to other banks in the past four years, but kept recording the loans as assets in its own balance sheet. Thus the bank’s capital positions were inflated, artificially boosting profits and generating higher bonus to executives.
Anomalies noticed
The Central Bank took notice of anomalies in the market earlier this year, and pinpointed them to Panamericano. In September, the managers of the bank were summoned by the regulators to provide explanations.
Two months later, the bank received an injection of BRL2.5 billion ($1.47 billion) from FGC, Brazil’s deposit insurance fund. Several managers were fired, CEF is strengthening its presence in the board, and the majority owner of Panamericano, media entrepreneur Silvio Santos, had to put some of his companies and even properties on the line as guarantees to the loan.
The authorities celebrated the case as a sign that Brazil’s regulatory framework is doing its job.
“The important thing here was that the Central Bank was able to identify the problem before it caused harm to the system,” said Henrique Meirelles, outgoing chairman of the Brazilian Central Bank. “The only person to have been affected by the fraud was the controlling shareholder, which is the right thing to happen.” But the crisis has raised concerns that governance in Brazilian small and medium banks may not be up to scratch.
In an interview with economic daily Valor Econômico, Renato Martins Oliva, the chairman of Associação Brasileira de Bancos na industry association, conceded that investors were spooked by the idea that Panamericano might not be an isolated case, and that more time bombs involving the sales of loan portfolios could be hidden in banks’ balance sheets.
Proof of that is the fact shareholders have, in recent weeks, hired external auditors to go through, again, the data on sales of loans portfolios by banks they own, he said.
“I don’t see another Panamericano in the system,” said Oliva. But there is no doubt that, in Panamericano’s case at least, governance left much to be desired.
“Shareholders were not paying enough attention to the reports. Auditors didn’t do their work properly. It was string of failures,” said Norma Parente, a former chairman of Comissão de Valores Mobiliários (CVM), Brazil’s securities commission.
Meirelles rejected any hint that regulators were to blame for the Panamericano mess, pointing to corporate governance structures of banks as the main culprits for having missed irregularities that took place for a number of years.
In this context, the episode has highlighted the role of auditing companies in guaranteeing the reliability of bank reports, which are the documents that the Central Bank examines in order to check the systemic health of the banking industry.
Two of the most respected names in the industry have been caught up by the bad publicity of the case. Deloitte was the external auditor of Banco Panamericano, and allegedly they did not spot the discrepancies.
KPMG, for its part, was the auditor chosen by CEF in the due diligence process prior to the capital injection and apparently, they did not report anything wrong either.
“Auditing processes need to change in Brazil,” said Marcos Assi, a São Paulo compliance and accounting expert. “To reduce their costs, auditing companies send junior staff to perform delicate audits when clients are not big enough.”
As a result, many of the people responsible for keeping managers on their toes are ill-prepared for the task, especially when complex operations are the matter.
“During the financial crisis, the Central Bank urged small banks to sell their credit portfolios. Auditors should therefore be aware that they needed to check these operations thoroughly,” added Assi.
Parente, for her part, noted that proposals have been advanced by CVM, when she was the chairman, to impose a rotation of auditing companies, which would reduce the risk that irregularities went ahead unnoticed. But, according to her, the Central Bank has rejected the move, and auditors are only required to rotate the staffers who check the accounts of their clients.
Harsher punishments
Assi argued that harsher punishments for auditors who do not do their jobs properly should also be considered to spruce up the quality of auditing in the market as a whole.
But Brazil’s record in this particular area is not bright. The Central Bank has announced, meanwhile, that it is overhauling the way it oversees the sales of loan portfolios. A new specialised team has been formed within the institution to compare data provided by banks that sell and buy the loans, in order to identify discrepancies more quickly.
The Central Bank has also been reported to have drafted a list of 14 former executives of Panamericano suspects of being the main authors of the fraud. Engaging into a bit of punishing would be an important by Brazilian authorities towards avoiding damage to the reputation of the Brazilian banking system. After all, Brazil’s long history of white collar crimes impunity is seen by experts as a major reason why scandals like Banco Panamericano take place.
Fonte: Renato Amaral, Retail Banker International